Rolling US Economy Into The Shitbin Thread

I really don't care if they tax scumbag bankers at 90% or 190%.

Two interesting posts/articles: (a) James Kwak (of Baseline Scenario) on why AIG may not be 'too-big-to-fail' (the short answer: study AIG's transactions and then, on a single day, let AIG fail and bail-out those AIG counterparties who are owed money from AIG's credit default swaps and who really can't be allowed to fail (and let the other counterparties go without)) and (b) Kwak and Simon Johnson (also of Baseline Scenario), in a NYT editorial, on why it's better to clean house at AIG than to encourage AIG to 'retain its talent'.

also, mr. liar's poker's take on the AIG bonus kerfluffle.

90% tax rate = good move

& historically sane:
the top tax bracket peaked at 92% in the 50's, and has been steadily declining since the 60's.

http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_top_rates

matt taibbi gives his take starting with aig and then recounts the whole mess, from sandy weill and joe cassano on: http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print

ok that Taibbi article is fantastic. We are fucked. It's been fun while it lasted, guys.

90% tax rate = good move

& historically sane:
the top tax bracket peaked at 92% in the 50's, and has been steadily declining since the 60's

Historical yes, sane no.

No problem with taxing the rich, but the pre-Reagan administration rates were...punitive.

I'm totally okay with it being punitive for a while, even if hurts the economy

me too. whether we're fucked or not i wish there were more piss aimed at guys like joe cassano and christopher cox than people trying to fix the mess, who had nothing to do with starting it

One reason to aim ire at the guys trying to "fix the mess" is that those guys are wrapped up with the mess! They helped create it, and they're buddies with the people in charge at Wall Street. Here is a chance for Obama to prove his independence of this corruption...but who can he trust on what to do? Who is informed enough about how to get out of this mess that isn't implicated in this mess? Obama's style isn't to mess with the status quo very much. I guess we're in better hands with him than we would have been with Clinton (whose husband enabled this nonsense) or McCain.

But I can't help thinking that the chickens are coming to roost.

What "messing with the status quo" would you suggest?

(Sorry; re-read that and it sounded snarky, when it wasn't meant to be. Just asking.)

i was gonna say that a top marginal rate of 90% may be good for discouraging really outsized corporate paychecks -- then i remembered that the long-term capital gains rate is still at 15% and that the really obscene amounts paid out for executive compensation are done in the form of options and stock (which are taxed at 15%).

Re. Messing with the status quo: weaning our economy off financial services, for instance. At least off such a heavy reliance on them. They are not healthy for democracy, since democracy requires an informed voter base, and it is hard (by design) to understand how these instruments work, both in theory and as implemented in practice.

don't get how you assume bo and crew are status quo in the same way as like phil gamm and angelo mozilo are. i mean if you're gonna play guilt by association at least name the associates. i'm not trying to be hostile here, i'm genuinely curious. is larry summers somehow as bad of a guy as hank "three pages" paulson?

I love that this is the only official photo of Joseph Cassano:

http://i.dailymail.co.uk/i/pix/2008/09/21/article-0-02B4D38E00000578-105_233x695.jpg

At first it was funny just seeing it on TPM all the time, but now that they're using on NBC et al. it's only getting funnier and funnier.

he kinda reminds me of buster bluth trying to hide

will be played by joe pantoliano in the oliver stone movie.

anyway, since jim corzine was invoked upthread here's what he had to say about how to handle the banking fiasco:

which, as an NJer who has watched this guy for 9 years now, i can say is typical corzine BS: i.e., talking out of both sides of his mouth and pleasing no-one.

Re. Messing with the status quo: weaning our economy off financial services, for instance. At least off such a heavy reliance on them. They are not healthy for democracy, since democracy requires an informed voter base, and it is hard (by design) to understand how these instruments work, both in theory and as implemented in practice.

Thinking about that as I read this:

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

So many things occur to me from this article (mostly questions).

Yeah, I don't think Obama = Phil Gramm. I don't think he's going to enable more of this nonsense. But does he have the power to roll back the power of the financial services industry as it already exists? I'm not yet confident that he does.

Obama's right: politics is about us, not him. We've got to get our shit together and solve the problem ourselves, by pushing for change. Only under that condition can a US president justly take on the plutocrats.

more like gaythner

Damn; that Rolling Stone article is so involved that I'm actually outlining it. But it's worth the effort. Thanks for linking to it.

he's been working on it for months. the timing of its appearance is pretty perfect

er guyz

http://www.nytimes.com/2009/03/21/business/21bank.html

I think that plan has been discussed for months. It's a smallbore solution to a much bigger problem, but the Obama Admin. may know that. FWIW, I don't like the idea, since it bets on the market rebounding sometime in the foreseeable future (since, in all likelihood as I understand it, the banks will take a haircut on their toxic assets, but not a huge one).

Wow @ that Rolling Stone article. Even with the outline I made of it, my head is spinning.

Here's the key concluding paragraph, which echoes a theme discussed here recently:

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

Now I've got to GOOGLE those shadow entities that the Fed recently created to pump government money into private hands, with little or no transparency: The Term Auction Facility; the Term Securities Lending Facility; the Primary Dealer Credit Facility; the Commercial Paper Funding Facility; the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; a Money Market Investor Funding Facility; three facilities called Maiden Lane I, II and III, designed to aid bailout recipients like Bear Stearns and AIG.

Ah, on second thought, maybe I'll GOOGLE tomorrow.

a steaming pile of shit

The more I think about this "public-private partnership" idea, the more I dislike it. Basically, it means we're privatizing any gains in these troubled assets, and nationalizing any losses. That is, if the toxic assets purchased do rise in value and become net profitable, the private investors that bought the assets -- using taxpayer money for up to 85% of the purchase price -- they get the benefits, and all the government/taxpayers get is a return of the principal (eventually) plus the interest payments on these "low-interest loans." So that's a great deal for the investors.

By contrast, if the assets do not rise in value (or if their value continues to plummet), the investors can default on the loans. And the government/taxpayers get . . . what? The toxic asset? That's cold comfort. Some other secured collateral posted by the investors? I haven't heard that. So again, that's a great deal for the investors. For taxpayers? Not so much.

And buried in the NYT article as "stage three" of the plan is a reference to the Treasury's plan to expand lending through the Term Asset-Backed Securities Loan Facility, which is one of the shadow programs that the Rolling Stone article says have abruptly replaced "repo agreements" as the means by which the Fed controls and regulates the market. Wiki has an entry on TABSLF.

Paul Krugman hates the Geithner Plan.

Whenever I try to show all messages on this thread - and only this thread - my internet disconnects itself. Anyone else?

nm i just had to turn images off

What I want to see is more analysis of whether Treasury's plan will work, i.e., resolve the bank's horrible balance-sheet problems. If it does, I would be more inclined to accept, as Krugman puts it, the "heads I win, tails you lose" nature of this "public-private partnership" plan. I'm pretty sure the answer is that it won't work.

The moral hazard is simply astounding.

And then I start thinking about the fucking fees that private investment will collect running deals through this plan and it makes me want to throw up.

Christ, that Rolling Stone article is scary even if you ignore Taibbi's overheated prose.

Yep. It's helping me understand the CDO/CDS/deregulation axis, tho.

You guys also might wanna read House of Cards, the book that recently came out about the Bear Stearns debacle. It's flat out awesome.

The more I think about this "public-private partnership" idea, the more I dislike it. Basically, it means we're privatizing any gains in these troubled assets, and nationalizing any losses.

exactly. remember when socializing the risks and privatizing the profits was considered part of the problem? now it looks like it's being offered as official policy. all so they can pretend this stuff is a functional, private enterprise system.

wow nobody but nobody likes this plan.

this comment on the Naked Capitalism blog seems to sum it up

Since Geithner will let the banks buy and sell at auctions, he guaranteeing that the banks will overpay in buying assets from each other because it helps them to swap old trash for new trash at inflated bids.

Before each bank has old trash, and after they've got new trash plus cash plus non-recourse debt secured by the new trash. The auction is a complete charade. The banks are effectively trading trash assets with each other, and Geithner is pretending it is an auction as an excuse to give them 50%-100% undercollateralized non-recourse loans, which are obviously a handout to the extent of the undercolateralization.

Co-sign on value of RS article, though the multiple side mentions of meth heads and bald men suggests that Taibbi may have had a strange, troubled past.

Or our nation's strange, troubled future.

wow nobody but nobody likes this plan.

No. Bankers should love it. They get to unload their toxic assets at something between book and market value, keep their management structures, and live to bank another day. The investors should also love it, for reasons set forth above. And -- if the Obama Admin. is right, and the toxic assets will, sometime soon, show a net profit over the price they command at auction now -- everyone should love it. But that last possibility seems very unlikely.

toxic assets will show a net profit over the price they command at auction now... seems very unlikely

I agree, with one reservation. If the value of the dollar is sufficiently undermined by rapid inflation, or hyperinflation, then the asset prices in inflated dollars could be nominally higher, although far less in constant dollars.

Ahhh, I need to figure out this whole "inflation, hyperinflation, deflation, the dollar's relative value" business.

Krugman explains his objection to Obama's bank plan.

Krugman makes perfect sense to me there, though I admittedly have a hard time following some of the fine points of the crisis. But I do know that at the bottom of a very complicated mess of investment products is a very simple fact of housing prices that are still too high in many places. They only reached that level because of inflated credit and unrealistic expectations, and now there's a glut, and prices are out of whack with incomes, especially as they are now decreasing as unemployment rises. No matter how complex the products, if these homes and the mortgages on them are at the bottom of it all, no plan that relies on propping up the prices of homes or related assets can work.